Question

Use the information below to answer the questions that follow.
Wang Corporation follows generally accepted accounting principles in accounting for uncollectibles. Wang received notification from a bankruptcy court that its customer, Timber Creek, had been adjudicated and released from all claims presently pending against it by Wang Corporation. Frank Wang, owner of Wang Corporation, was not at all pleased with this decision. Frank had anticipated recovering at least $50,000 from Timber Creek, and that balance remained in the Accounts Receivable accounts of Wang Corporation. Because Wang Corporation has no further remedies for collection, Frank directed the accounting department to prepare a journal entry to write off the account of Timber Creek.
(a)	Prepare the journal entry to write off the Timber Creek account.
(b)	Explain why the actual write-off will not result in a reduction of Wang Corporation's income.
(c)	Suppose Timber Creek recovered from its bankruptcy and eventually voluntarily paid the $50,000 "owed" to Wang. Prepare Wang's journal entries to record the unexpected recovery.

Answer 1

• Requirement ‘a’

The journal entry would be

Accounts title	Debit	Credit
Allowance for Doubtful [Uncollectible] accounts	$           50,000.00
Accounts receivables		$          50,000.00
(Amount uncollectible now written off)

• Requirement ‘b’

The actual write off [as recorded in Requirement 1] will not result in reduction in Net Income because:

>as you can, none of the accounts debited or credited in the above journal entry are recorded in the INCOME STATEMENT. Hence, Income Statement remains un affected.

>Also, since Allowance method would have been used, the bad debt expense would have already been accounted for in the prior years, and actual write off will not affect the current period Net Income.

• Requirement ‘c’

Accounts title	Debit	Credit
Accounts receivables	$           50,000.00
Allowance for Doubtful [Uncollectible] accounts		$          50,000.00
(Amount written off, now re instated)
Cash	$           50,000.00
Accounts receivables		$          50,000.00
(unexpected collection of written off amount)